'Glimmer of hope' on UK economy for George Osborne

An initial glimmer of hope on the economy is expected this week with a new
report set to claim that pressure on household finances has begun to ease
even though the economy will remain flat.

Despite the downgrade, ITEM will stress that the outlook for the UK is improving – with strong growth in the second half of the year. Efforts made by the Government in the UK and by the eurozone to grapple with the debt crisis are also beginning to pay off, it will say.

The Ernst & Young ITEM Club economic forecast will claim that household disposable income should start picking up towards the end of the year as inflation falls sharply – triggering greater consumer spending and giving retailers a boost. Such a move could spark an "Indian summer" on the high street.

In the final quarter of the year, real household disposable income will rise by 1.5pc, and will climb to 2.5pc in the first three months of 2013, the report will claim tomorrow.

The boost will be driven by a sharp fall in inflation, which ITEM will say should fall to 1.7pc in the three months to December largely due to a fall in energy prices. Official figures out this week are expected to show that inflation last month was 2.7pc, a fall from 2.8pc in May.

Coming after two years of declining real incomes, the effect will be to restore consumer confidence among households and underpin growth in 2013.

However, ITEM will downgrade its forecasts for the whole of 2012 to 0pc, from 0.4pc in April, due to the scale of the double-dip recession. That rises to 1.6pc in 2013, two-thirds of which will be due to increased household consumption.

ITEM's 2012 downgrade will be followed by similar action from the International Monetary Fund, which is tomorrow expected to slash its forecast for 2012. The IMF currently expects growth of 0.8pc next year, but it is likely to bring that closer into line with the latest consensus of 0.3pc.

Despite the downgrade, ITEM will stress that the outlook for the UK is improving – with strong growth in the second half of the year. Efforts made by the Government in the UK and by the eurozone to grapple with the debt crisis are also beginning to pay off, it will say.

The eurozone's plans for a banking union, combined with the growth pact, have reduced the risk of a full-blown euro catastrophe. As a result, the single bloc's economies should start to recover, providing a confidence boost to UK exporters. In its most upbeat outlook for months, ITEM will say that the boost to confidence could also lead to a faster recovery than currently expected.

ITEM will also welcome the Bank of England's funding-for-lending scheme as evidence that the UK authorities are attempting to rescue the economy by fixing problems within the banks, rather than just propping up the system.

Unemployment, though, will continue to pick up next year – peaking at 8.7pc compared with 8.2pc currently.

In what it hopes will be another boost to the economy, the Government is expected to announce plans to electrify the Midland Mainline from London to Sheffield. The BBC reported that Justine Greening, the transport secretary, is set to give the go-ahead to the £500m scheme, possibly as early as tomorrow.